It's Time to Start Watching for the Next Yen Setup

At least two more short trades should be in store.

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The Japanese yen (represented by the ProShares Ultra Yen ETF (NYSEARCA:YCL) and the ProShares Ultra Short Yen ETF (NYSEARCA:YCS)) has been on a tear downward since 2011, and the challenge for swing traders has been to find the safe entry points and optimal exit points to ride that trend. This article is intended to help identify those points for 2014 and beyond.

By the time we started writing publicly about the yen, price had already traced much of the enormous "3rd of a 3rd" wave of 2012-2013. In January 2013, we encouraged our readers who had been riding the short trade to take profits at two target levels. Then we advised waiting for the next shorting opportunity to set up. Now we find ourselves suggesting a similar strategy going forward from January 2014. (A recap of our coverage of the yen in 2013 can be found here.)

The trade we've been watching in recent months began at the completion of the triangle wave [iv] shown on the monthly chart below. We believe price is currently falling in wave [v] as part of the larger wave 3. Since price has reached the first of our price targets (shown later on the weekly chart), the safe approach for any traders who are short would be to tighten stops and take at least partial profits. However, it is still possible that wave [v] could extend lower – perhaps to $0.009083 (or ¥110.10 for those accustomed to the inverse quote).

In this environment, attempting a swing trade to the long side is a very aggressive trade, and we don't believe there is enough technical evidence to support trying it at this price level. It's quite possible that price may bounce from the current area, but the risk of it not doing so is substantial. The better approach for the swing trader is probably to wait for the next short setup, which may occur after one or two upward corrections. On the monthly chart, potential short-trade opportunities correspond to the expected moves from the end of the predicted corrective wave [a] down in wave [b] and later from the end of the large corrective pattern 4 down in wave 5. The placement of the terminal points on the monthly chart is guided in part by the empirical 11-month cycle that can be gleaned from price data.

The weekly chart below shows two outstanding price targets coming out of the triangle. Wave [v] may extend to the lower target, but it does not have to. Also note that cyclical influence will start pointing upward, beginning in the first quarter of 2014. The cycle shown on the weekly chart has a period of 47 weeks.

For a daily chart and a detailed examination of the move out of the triangle, please see the extended version of this article available at our website. The daily price action makes it clearer that the present downward wave can extend.